The SBA 7(a) loan program is an excellent way for hoteliers to obtain acquisition financing for hotel properties. Since the lending market considers hotels riskier than other commercial assets, the SBA loan guarantee helps mitigate loan loss risk on defaulted loans and encourages commercial banks and commercial non-bank lenders to make construction and permanent hotel loans that they would not otherwise consider. In essence, 75% of the loan amount is guaranteed by the U.S government. In the event of default and a loss on disposition of the collateral securing the loan, the SBA will reimburse the lender for 75% of its loss.
The rub for borrowers is the vast majority of SBA 7(a) loans is floating rate, tied to the prime rate. The margin is typically 2%-2.75% over prime. From 2008 until December 2015, the prime rate was 3.25%, and SBA 7(a) borrowers enjoyed no rate adjustments during that seven-year period. However, in 2015, the Federal Reserve signaled it was going to begin increasing the federal funds rate, which directly impacts the prime rate. As a result of federal funds rate increases in December 2015, December 2016, March 2017, June 2017 and December 2017, the prime rate is now 4.50%. With two to three increases anticipated in the federal funds rate for 2017, the prime rate could reach 5.0% and SBA 7(a) loans priced at Prime plus 2% would reach 7.0%.
“With interest rates for $3-million to $10-million 10-year fixed-rate CMBS conduit loans for franchised hotels in the 5% area, we are receiving many requests to refinance SBA 7(a) loans and non-SBA floating rate loans into fixed-rate CMBS conduit loans,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The economics for refinancing into a fixed-rate CMBS conduit loan is very compelling right now.”
To obtain a fixed-rate CMBS conduit loan quote from Mike, contact him at msneden@valuexpress.com.
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